Wednesday, August 15, 2012

Eastern Washington's Douglas County was recently forced to rebid a roadwork
project after receiving a large number of unbalanced bids that exploited an
error in the project specifications.

Unit price bids: Projects are vulnerable to unbalanced bids when
they use unit price bids, where the overall bid amount must be itemized and
include the unit price for each item (e.g. a bid item for 100 widgets that a
bidder prices at $1/each means that $100 of their total bid amount is the cost
of widgets). This makes determining prices for quantity changes more
straightforward (if 50 extra widgets are needed, the contract amount is just
increased by 50 x $1 = $50).

Unbalanced bids: Sometimes, however, bidders will try to game the
system by unbalancing their bid: manipulating a unit price in order to profit
from future quantity changes, usually compensating by changing other prices
elsewhere in the bid to avoid affecting their overall bid amount. For example:

Inflating bid prices: If a bidder anticipates that the quantity of an item will be
increased, they may artificially inflate that item's unit price (if the bidder
guesses that 50 extra widgets will be added, they might list widgets at
$100/each in hopes of a $5,000 windfall, and then lower the cost of another item
to maintain the same overall bid amount).

Lowering bid prices: The opposite technique is also used:
artificially lowering the unit price for items the bidder thinks will
have their quantity reduced, minimizing the impact those reductions will have on
the overall amount the bidder gets paid.

Risks of unbalanced bids: Both types of unbalanced bids can of course backfire for the bidder if they
guess wrong. They are also detrimental to the public agency, since a low bid that is
unbalanced may not end up being the lowest after changes to the project have
been made. An unbalanced bid that carries this risk for the public agency is
termed materially unbalanced.

The Douglas County situation: The county solicited unit price bids
for a roadwork project that included a bid item for asphalt, which was estimated
to be $75/ton. The county later realized that the specification listed more
asphalt than the project needed, among other things. Upon reviewing the bids,
they saw that several contractors had also spotted the error and - anticipating
a reduction in the amount of asphalt - attempted to take advantage of it by
unbalancing their bids. The low bidder, for instance, listed a unit price for
asphalt of just $0.01/ton.

County's analysis of bid environment: County engineer Doug Bramlette attributed the unbalanced bids to
contractors in unusually dire need of work, noting that bidders would normally
have pointed out the error so the county could correct it. "The bidding climate
is so competitive that we’re seeing some unusual things occur here," he said.
The project will be rebid, delaying it by four to six weeks.

Lessons learned:

Accurate specifications: The county's situation illustrates the
importance of accurate specifications: as can be seen, bidders will not always
help correct the owner's mistakes and may even seek to use the errors to their
own advantage.

Language permitting bid rejection for unbalanced bids: While most standard specifications include language allowing the public agency to reject all bids and re-advertise a project (as Douglas County had to do), it's important to also include provisions
making it clear that unbalanced bids will be rejected as non-responsive, a potentially less
time-consuming and costly option than completely rebidding a project.

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For more than 30 years, I served as a contracting manager for major public agencies in Washington State (City of Seattle, Seattle Housing Authority, and University of Washington). In addition, for more than a decade, I have provided consulting and training to more than 100 public agencies, industry associations, and businesses across the country on the managing the complex world of public procurement and contracting. In March 2015, I discontinued regular postings to Mike Purdy’s Public Contracting Blog in order to focus on speaking and writing a blog and book about U.S. presidential history. Please visit www.PresidentialHistory.com where you can sign up for a free email subscription to my Presidential History Blog. I am still providing consulting and training on public contracting issues.

Copyright 2007-2018 by Michael E. PurdyThe opinions expressed in this Blog are those of the author only. The opinions and information provided in this Blog are for educational and informational purposes only and do not represent legal advice. Mike Purdy is not an attorney. Readers of this Blog are encouraged to consult with an attorney to obtain legal advice. To reproduce or use any of the content of Mike Purdy's Public Contracting blog, please contact Mike Purdy at http://www.mpurdy.com/contact to request permission.